The investment community must be prepared for unexpected surprises in climate risk assessments and plan strategies based on these expectations, according to a panel of speakers at a webinar held by AllianceBernstein and Columbia Climate School.
The discussion looked at the climate problem, the solutions on the horizon and the actions investors can take to prepare themselves.
According to Radley Horton, associate research professor at the Lamont-Doherty Earth Observatory, Columbia University’s Earth Institute, investors must be prepared for unexpected surprises when it comes to climate change risk.
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This includes both transition risks, such as “supply chain disruptions and shifts in risk perception”, and physical risks, such as the probability of the risk of “simultaneous drought and crop failures in multiple regions in the same year”.
“If we don’t think of all the risks, we will be blind to the most impactful situations,” he said. “Our thinking needs to be much more creative, we can’t focus on just linear quantitative risk assessment.”
Arthur Lerner-Lam, senior adviser to the Deans of Columbia University’s new Climate School, agreed “the notion that there could be compound and multi-hazard risks” is underrepresented in current climate risk assessment.
He said: “The change in the decision culture is going to be part of the discussion going forward. There will be changes in regulation, technologies, and various opportunities arising from this – the whole environment is going to be changing.”
How to approach
Lerner-Lam highlighted that a combination approach to reducing carbon emissions is key, including understanding and development of carbon removal technologies.
He said there are some “promising technologies” on the horizon, “but questions remain if they are scalable to the size of the problem”. At present, it is estimated that collaborative efforts from the private sector, governments and universities could contribute around 20% of carbon reduction, for example.
Michelle Dunstan, chief responsibility officer at AllianceBernstein, also pointed out that companies must look at the longer-term impact of climate change, while currently “assets are evaluated on a timeframe that is much shorter [than the impact of climate change]”.
“The way in which climate will impact societies is complex, and investors are not used to analysing this,” she said. “There are near infinite paths and climate outcomes are not normally distributed.”
For example, direct impacts of climate change could include a carbon tax being imposed in a specific region or industry, and firms must consider how it impacts their income statements.
There will also be less direct impacts, such as evolving consumer preferences, and even an impact on talent retention, as younger people tend to make values-based decisions about where they want to work.
In addition, she warned investors can expect inflation and interest rates to be higher going forward as a result of inflationary pressures from climate change mitigation.
However, she said “inflation in and of itself is not bad”, adding it would be wrong to “immediately go in with the mindset that all inflation is negative”.
The key is to understand where the inflation is coming from to be able to understand how to address it. She explained that when it comes to climate change, inflation comes from the fact that there will have to be increased spending on mitigation and adaptation, which will “crowd out more productive spending”.
Essentially, we are “paying for something that already exists rather than creating something more innovative”, she said.
With the impacts of climate change already being felt around the globe today, it is particularly pertinent for investors to prepare their strategies for all the various facets of climate change risk.
